World Bank ups emerging Europe loans to offset crisis

LONDON Wed Jan 25, 2012 1:53pm GMT

An EU flag flies on the frontage of the National Bank of Hungary building in Budapest, January 18, 2012. REUTERS/Bernadett Szabo

An EU flag flies on the frontage of the National Bank of Hungary building in Budapest, January 18, 2012.

Credit: Reuters/Bernadett Szabo

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LONDON (Reuters) - The World Bank said on Wednesday it would make $27 billion (17 billion pound) available in funding over the next two years to eastern European and central Asian countries that are being hard hit by the crisis in the euro zone, a $7 billion boost from 2011 levels.

The bank said in a statement that the crisis in the single currency zone was impacting the region's emerging economies through trade, finance and workers' remittances, leading to slower economic growth.

World Bank President Robert Zoellick said the expansion in funding was aimed at helping the countries weather the crisis.

"While the effects of the Eurozone crisis on the largest economies of western Europe receive most of the world's attention, the crisis is also hurting people in emerging eastern European countries, particularly the poorest in central and southeastern Europe," Zoellick said in the statement.

The funds for 2012-2013 comprise $16 billion in World Bank loans, a $4 billion increase from last year. The International Finance Corporation, the lender's private sector arm, will provide $10 billion, $2 billion more than last year.

The Multilateral Investment Guarantee Agency, a World Bank arm that provides political risk insurance to investors and lenders, will provide an additional $1 billion.

The cash would go towards funding structural reforms for the private sector as well as supporting the banking sector and social safety nets, the World Bank added.

The International Monetary Fund predicted this week that the euro zone would slide into recession in 2012 and sharply cut forecasts for emerging markets to 5.4 percent. It expects central and Eastern European economies to grow just 1.1 percent this year, down from over 5 percent in 2011.

Growth in the former Soviet Union is forcast to slip to 3.7 percent from last year's 4.5 percent.

One big fear is that capital retrenchment by Western banks, traditionally big lenders to emerging Europe, will lead to banking or debt crises across eastern Europe, a region which is heavily dependent on the euro zone for investment and exports.

This has prompted multilateral lenders including the World Bank and the European Bank for Reconstruction and Development (EBRD) to step up efforts to limit the damage, with the latter saying on Tuesday it was ready to buy stakes in local banks if the debt crisis worsens[ID:nL5E8CO2M6].

The EBRD, which has also cut its 2012 growth forecasts for emerging Europe, said it plans to keep its lending across the region at 9 billion euros, stable from last year's record high.

Governments, regulators and international agencies have also agreed on a concerted effort to avert capital flight from the region under a programme dubbed a second "Vienna Initiative," loosely modelled on a 2009 pact that prevented a financial meltdown in eastern Europe.

The World Bank said its additional lending plans complemented its participation in the programme.

The IFC's involvement would provide short-term financing to systemically important regional banks to tide them over liquidity crises, the statement said. The IFC would also invest to shore up capital shortfalls and provide funding for small enterprises, it added.

The euro zone crisis and a potential spillover to other countries have also prompted the IMF to seek a substantial increase in its capital base as it foresees an increased need for its assistance in coming years.

(Additional reporting by Carolyn Cohn; editing by Anna Willard)

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